What is the latest on the ECB’s plans to purchase ABSs?

The ECB has been looking into measures to stimulate growth in Europe and these have included discussions around the potential for outright ABS purchases by the ECB.

This form of private quantitative easing (QE) would not only help revive the European ABS market but would complement the imminent Targeted Longer-Term Refinancing Operations (TLTRO) programme with the aim of improving monetary transmission to the real economy.

The announcement by the ECB on October 2 gave some detail in defining the universe of eligible securities for the ABS Purchase Program (ABSPP).
They will generally target senior, investment grade ABS, collateralised by European assets.

We’re now waiting for the actual implementation detail which is expected before year-end. ‎

The securitisation of household debt – specifically, residential mortgages – was a driving force behind the GFC. Should investors be concerned about the securitisation of credit card, auto and residential loans in Europe?

We don’t foresee a confluence of factors arising in Europe in the same way they did in the US pre-GFC where, for example, there were typically lax underwriting standards and excessive leverage which was exacerbated by a bubble in US housing prices.

Europe, however, has experienced markedly more stable performance both in the underlying assets and in securitisations.

We think the involvement of the ECB should encourage a wider range of investors into the market and provide issuers with more confidence regarding the stability of the funding channel.

We believe ECB action will generally improve ABS liquidity and it should be supportive of securitisations more generally.

BlackRock was appointed by the ECB as a consultant re: ASB purchases on 27 August. What has their role been so far?

Blackrock Solutions is advising on the implementation of the ABSPP.

The scope of the programme in terms of the universe of eligible securities was largely specified in the ECB’s announcement on 2 October.

The details of the ABSPP implementation in terms of purchase process have yet to be disclosed. We’re expecting this in the coming weeks.

The ECB appears to want non-bank players to step into the ABS space to free up banks to lend to SMEs. Is this likely to work?

That’s certainly our understanding of their intentions. 

In addition to the ABSPP, the ECB Covered Bond Purchase Programme, as well as potentially more liberal regulatory capital treatment for banks and insurers, should support asset prices over time and potentially help to restart the new issue securitisation markets. 

As the ECB’s president, Mario Draghi, said on July 3: “We are interested in ABS … to heal the impairment of the bank lending channel. And we are interested because we want to channel lending to the real economy, and more specifically, to the SMEs.”

How is CQS positioning its portfolio in light of the ECB's apparent commitment to supporting the ABS market?

CQS has been investing in the European ABS market since 2007. 

We are fundamentally-driven investors and we perform asset level and structural due diligence on potential CQS investments in ABS.

The markets are moving rapidly, have become more volatile and we believe a nimble approach to investment is warranted.

The potential of ECB support for the market has been one of the drivers of tighter spreads throughout 2014.

We increased the weighting of peripheral ABS, specifically Spanish residential MBS, early in the year partially in response to this possibility.

[Following] the 2 October announcement, we have taken profits there and rotated into other assets that we believe are relatively more attractive and have better potential for spread compression: for example, those that were excluded from the ABSPP, such as UK non-conforming RMBS.

How do you think the ECB will go about purchasing ABSs?

This has yet to be specified.

One possibility is that the ECB will appoint several European asset managers to select, purchase and manage securities from the eligible universe specified by the ECB.

There is precedent for this if we think back to the US’ PPIP (Public-Private Investment Program) within TARP (Troubled Asset Relief Programme) which was implemented by the US Treasury Department in 2009.

Although the primary objective of PPIP was to support asset prices, the programme solicited private capital which was matched by government funds and leveraged.

With the ECB’s ABSPP, the goal is to inject euros into the eurozone economies. Hence, although it’s possible the ECB uses external asset managers, we think it’s unlikely to involve private capital.

What are your thoughts about the situation in Europe and the prospects for the region? How will the ECB's purchases of ABSs change things?

Lack of growth is a real issue. As Mario Draghi emphasized in his Jackson Hole speech to central bankers in August, in addition to monetary policy, fiscal policy, structural reform and regulatory reform are key ingredients to a eurozone recovery.

To help tackle the monetary policy issue, Mario Draghi would like the ECB to use ABS to stimulate the monetary transmission mechanism to the real economy to encourage lending to small and medium-sized enterprises and consumers, and to help grow the non-bank lending sector.

ABS assets touch every part of the real economy across a number of European countries.

We remain positive on the outlook for the ABS sector.